Strip clubs are set to move into George Street, bringing lap dancers to the city's cinema district.
The downturn at Kings Cross since the death of two teenagers and the imposition of 1.30am lockouts, identity scanners and tough government restrictions are driving the move to find new customers.
Michael Tsoukatos, who previously managed Dreamgirls in Kings Cross for Frank ''Ashtray'' Amante, and owned a strip club there, wants to turn an internet cafe on George Street into a ''small bar'' with a difference - nude table-top dancing, striptease and 12 private show rooms.
The small bar would fall into a new category of liquor licence created last year that would make it exempt from the lockouts and the liquor licence freeze imposed on the city.
If his application succeeds, Mr Tsoukatos plans to entertain up to 60 patrons at a time, serve alcohol until 2am and stay open until 3am.
He has told the City of Sydney his adult entertainment venture will enrich the city's vibrant and diverse culture and is in line with the government's new alcohol legislation.
The bar will be in a basement below a home decor shop, next door to Hungry Jack's and 100 metres from World Square. ''I don't think there's anything similar in the area,'' Mr Tsoukatos said.
Five large pubs are nearby.
The Australian Hotels Association says foot traffic in Kings Cross is down 40 per cent since lockouts began in February.
People have stopped travelling to Kings Cross and are instead staying at city venues, Mr Tsoukatos said.
''It's made a massive difference,'' he said. ''You have cut their lifeline, which is their door at 1.30am. I could just see the writing on the wall.
''The reason I moved to the city was the earlier trading pattern - after dinner, and 3 to 4pm.''
He took over the Governor's Pleasure strip club on Clarence Street 18 months ago after the first crackdown on Kings Cross venues that imposed a ban on serving shots after midnight. The club was renamed Velvet Underground.
Mr Tsoukatos said that, because of the new alcohol laws, the only way to expand was through small bars.
Small Bar Association president Martin O'Sullivan said he was ''fearful of the repercussions'' of strip clubs applying for small bar licences.
''I am not a fan of strip clubs,'' he said. ''I see they have a place in society but small bars have been successful because they have prided themselves on being more female-friendly than a pub.
''It would be a step backwards. Strip clubs definitely shouldn't be associated with small-bar culture.''
The Office of Liquor, Gaming and Racing said six small bar licences were approved in the city last year, and three new applications had been lodged in the lockout zones.
Small bar Papa Gede's wants to extend its hours from midnight until 2am.
A spokesman for Hospitality Minister Troy Grant said the government's alcohol violence plan would ''ensure our streets are safe and encourage cultural change''.
''This plan is in place across Sydney's CBD entertainment precinct, which includes both Kings Cross and George Street,'' he said.
Two city strip clubs, Pure Platinum and Men's Gallery on Pitt Street, went into voluntary administration in August.